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Can home ownership help finance an ageing population?

Across the EU the trend towards a shrinking and ageing population is accompanied by a significant increase in the extent of home ownership, with some two-thirds of European households now owning their homes. The net value of these properties is estimated at Euro 13 trillion in the 15 older Member States, and almost Euro two trillion in the 10 Member States joining in 2004. Housing equity within the EU25 as a whole is some 40% higher than total GDP, the figure being particularly high in New Member States and in some Southern countries, and lower in North and North West Europe - see Figure 1.

The DEMHOW research project investigated the links between demographic change and housing wealth, assessing the extent to which home ownership could remedy some of the financial consequences of ageing populations. Anticipated economic consequences, resulting from additional costs of pensions and social care, include a reduction in GDP growth (compared to expected growth in the absence of an ageing population).

In a cross-section of EU Member States, retirement planning was not found to be the primary motive for buying a home, although most households view owning a home as a good investment. Fluctuating house prices are not generally seen as a risk, especially where people plan to stay in the house for many years if not a lifetime. Country-specific factors may influence the speed at which home owners pay off their mortgage. For example in the Netherlands, significant tax incentives, alongside adequate retirement pensions/incomes, mean many people keep a mortgage into retirement.

DEMHOW found that pension planning is approached differently by older and younger generations. Younger households believe it is increasingly unlikely that the state will provide for their old age and that individuals will have to take more responsibility for their own pension provision. Older people see the state as having a more central role - having paid taxes throughout their working lives, they believe the state is responsible for providing them with a pension. Of all cohorts, those in middle and late middle age appear to be most worried because they may not have enough time available to adjust to new policies.

The wealth held in the form of home ownership could contribute to people’s incomes in two ways. The first is an income in kind whereby those who own their home outright enjoy the standard of living conferred by the house without having to pay rent. In comparison with a tenant of a similar property and similar income, they are better able to enjoy a higher standard of living. The second way is through converting some or all of the value of the house into an income, perhaps by using a financial product such as a reverse mortgage that allows the household to go on living in the house, having ‘sold’ a proportion of its value to a bank.

Financial products to release housing equity are often met with a lack of enthusiasm by older homeowners. Three key barriers identified are: firstly, the desire to leave a bequest is important in some countries (e.g. Hungary), although people without children may be more open to mortgage equity release in old age than people with children; secondly, a lack of trust in the providers of equity release products makes them unattractive, although government-related financial institutions such as the Sparkasse in Germany are regarded as more reliable; and thirdly, the products sometimes seem expensive, appearing to offer a small income relative to the amount of the equity transferred.

The challenge for policy makers is to develop fair and sustainable policies in the fields of pensions, housing, fiscal policy and social policy that take housing equity assets into account. One approach would be for governments to be centrally involved in the reverse mortgage market, for example by offering guarantees that would have the consequence of bringing down costs, or by providing a convincing regulatory framework that would provide consumer confidence.

Such policies would need to consider that:

There are pension-related reasons for encouraging people to become home owners - this encourages them to save during their working years and enables them to live rent free when they retire. But present levels of home ownership are only sustainable with large subsidies (in the form of tax incentives) which may not be the best use of public funds.

If reverse mortgage products were more widely available, older people could continue living in their homes and boost their cash income. This would require considerable adaptations to existing legal arrangements and possibly public subsidies, such as guarantees. People seem reluctant to use their housing equity, particularly if state pensions and social protection measures do not seem robust, so the use of housing equity appears conditional on, and not a substitute for, state spending.

While housing equity could boost the living standards of some older people, those with the most housing income tend to have the most non-housing wealth and the largest pensions. This limits the impact of home ownership as a means of reducing poverty. Housing equity is irrelevant to the income needs of those older Europeans - frequently the very poorest - who rent their homes. Moreover, providing equity release mortgages involves risk to financial institutions in areas with shrinking populations or for older people in less well-maintained dwellings. This may reduce their willingness to offer these products in such circumstances.

The DEMHOW researchers conclude that housing equity can boost the income of older people but it may not be a fiscally cheap option.